From the June 1997 issue of Entrepreneur

An employee you fired has given your name as a reference for a new job. You'd like to save someone else from trouble by telling the prospective employer what you know. However, your lawyer has advised you not to give out references.

If you haven't listened to that advice before, you'd better start listening now. For the past decade, attorneys have advised employers not to provide references because a former employee might sue over defamation. In February, the U.S. Supreme Court issued a ruling that gives employers an even stronger reason to clam up. The ruling effectively extends the reach of federal anti-discrimination laws to former employees, who may now sue you over a bad reference by claiming your motive was retaliation.

The case, Robinson v. Shell Oil Co., concerns a man discharged from his job at Shell. The former employee filed a charge with the Equal Employment Opportunity Commission, claiming he'd been fired because of his race. While that claim was pending, he applied for a job with another company, which contacted Shell for a reference. After learning the reference was negative, he filed a lawsuit--this one claiming the bad reference was in retaliation for the discrimination claim. (Under Title VII of the Civil Rights Act of 1964, it's illegal to retaliate against an employee who has sought protection under the act.)

Before deciding whether Shell intended to retaliate, the courts had to determine whether Title VII applies to former employees. The District Court dismissed the case, ruling former employees are not protected. The Fourth Circuit of the U.S. Court of Appeals agreed. But because other courts are divided on the issue, the U.S. Supreme Court agreed to hear the case.

The court's February 1997 ruling noted that the language of the act is ambiguous and concluded it was "more consistent with the broader context of Title VII" to hold that former employees are protected.

"This decision expands the reach of civil rights laws," says Patrick Falahee, a Chicago attorney specializing in employment law. "It's clear what direction the court is heading."

A Federal Case

Until now, former employees suing over a negative reference would go to a state court with a common-law defamation claim. Some former employees have won judgments in such lawsuits if they can show their former employers intentionally damaged their reputations.

However, in these cases, truth is a good defense. If you fired the employee for coming to work drunk and can document the occurrences, it's not defamation to tell a prospective employer the truth--especially because the prospective employer has a "qualified privilege" to know. That is, the prospective employer has a legitimate interest in the employee's behavior.

In a Title VII retaliation case, truth and qualified privilege are irrelevant. "Now it doesn't matter whether the employee was fired for misbehavior; the question is whether saying so was retaliation," Falahee says. The relevant question is whether the employee had previously exercised some right, such as filing a discrimination complaint. If it appears the employer might have been trying to get even by giving a bad reference, the employer might be liable under Title VII.

Making a federal case out of a bad reference is bad news for employers. Bringing the case into federal court entitles the plaintiff to trial by jury, which is more likely to be sympathetic to the employee than to the company. While each party in a state court case pays its own legal fees, a plaintiff who wins in a Title VII case may recover legal fees from the employer. In some cases, the plaintiff is also entitled to punitive damages.

Worse, it's possible for a disgruntled former employee who knows how to work the system to plan the whole thing: get fired for misbehavior, file a discrimination complaint, ask for a reference, and, if it's bad, sue.

Pamela Krivda, an employment attorney with Habash, Reasoner & Frazier in Columbus, Ohio, says many companies were already refusing to provide references out of concern over defamation suits, so this ruling won't change their behavior. For others, it may be the impetus for putting such a policy in place.

The legal safe harbor is simple: When another employer requests a reference, say it's company policy not to give out references. The problem is, such policies make it very difficult to do business, especially when you're hiring.

What's the bottom line? Says Krivda, "You have to decide for yourself: Is giving this reference worth a potential $50,000 lawsuit?"

Contact Sources

Habash, Reasoner & Frazier, 471 E. Broad St., #1600, Columbus, OH 43215, (614) 221-9400;

Law Offices of Patrick Falahee, 53 W. Jackson Blvd., #541, Chicago, IL 60604, (312) 322-1103.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.